The United Kingdom: Bad Circumstances and Bad Policy

For the past couple of weeks I have been in the United Kingdom (U.K), where two months of nearly continuous rain storms in many areas have produced extensive flooding. Such flooding has become somewhat of a fixture with every year or so at least one part of the country being flooded through more intense and longer-lasting rain events together with changes to storm tracks. As the world starts its journey from one stable climate equilibrium to another, the U.K. is being shown that it will be impacted.

Since the late 1970′s the U.K. has been run using neo-liberal policies which have moved large swathes of the public sector into the private realm, with the belief that the mythical “invisible hand” of the market will deliver the best outcomes. The country became reliant upon North Sea oil and gas, together with a hugely expanded and dominant financial services industry, to provide the funding for required imports. During this period the physical trade deficit has greatly expanded as the high level of the pound, together with a disinterested and sometimes incompetent government policy apparatus, has lead to a continued decline in the industrial sectors. This economic configuration places the country in an extremely risky position as North Sea oil and gas production has been rapidly declining, while the coal industry has been to all intents and purposes shut down.

Since 2005 the country has experienced an increasing deficit in trade in energy, with 42% of primary energy being imported in 2012. This is expected to grow to 50% in 2013, and continue increasing thereafter1. Only 5% of energy production is from renewables, including hydro-electricity, with the growth in wind farms being severely curtailed as the government moves away from guaranteed pricing for wind-energy suppliers, to competitive bidding2. The situation is being exacerbated due to the retirement of the country’s nuclear power stations this decade, with only a limited and slow replacement program planned. The Hinkley C reactor, to be built by the French firm EDF, required an electricity price set at twice the current level of wholesale prices and guaranteed for 35 years3. Such deals will both embed very high energy prices, and negatively impact the UK’s balance of payments as profits are repatriated by such foreign corporations. An additional complication is the planned closure of coal power stations, when imported coal is a relatively cheap energy source. Thus, the U.K. is trapped between its own declining energy production and the needs to reduce greenhouse gas emissions.

The foreign trade earnings of the financial and related sectors will be at great risk in the future, as cheap energy constraints brought about by either geological limits, or climate-change related demand restrictions, severely curtails global economic growth altogether. This will invalidate large swathes of a financial system developed for, and dependent upon, continued economic growth. This will greatly diminish the foreign earnings which have helped offset the diminution of the industrial economic sectors. . Given the large dependence upon imported food4, as well as energy, an emergency program reminiscent of the World War 2 “dig for victory” campaign may be needed just to provide enough food to feed the populace. With 58% of the country’s most productive farmland lying within floodplains, the effects of climate change could also exacerbate the issues of food security for the country4. It is estimated that 35.000 hectares of high quality horticultural and arable land will be flooded at least once every three years by the 2020s5.

In this context the nearly desperate focus on fracking for natural gas becomes very understandable, even though differences in geology, geography, rig availability, and politics to the United States will forestall the rapid development and production successes seen in that country. Short of a miracle, the U.K. could become the leading example of a failed state due to energy, and the resulting growth, constraints. There will also be the need for extensive investments to protect low lying areas, including London.

This is the reality that the politicians cannot discuss in the open, or perhaps even accept. Instead the country continues to rely upon the financial and related sectors, the extensive property investments in London of rich foreigners, and efforts to reinvigorate the debt-driven property bubble, to keep the country going. The only thing that the political opposition is offering as an alternative to current policies is a freeze on energy prices if they are elected6. Quite possibly sooner, rather than later, the longer term reality will rear its ugly head and the United Kingdom will be in for a very painful reality check. Hopefully, this sad example can serve as a spur to action for the more fortunate countries.